How to Use Rebate Trading in Day Trading

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How to Use Rebate Trading in Day Trading. There are many ways to make (and lose) money day trading in the stock market. Most day traders invest in a stock hoping the company will continue to grow and become more profitable. Other traders don't watch stocks but watch other traders instead. They "bet" on when market players will buy and sell stocks, selling stocks "short" to profit from a trend. Still others will buy and sell huge volumes of well-traded stocks to cash in on rebates offered by ECNs (electronic communication networks), or digital trading floors.

Things You'll Need

  • The fastest Internet access you can buy
  • Access to an ECN (electronic communication network)

Buy a large volume of stock, bypass a middleman broker and post your shares directly on an ECN. When you have a buyer, the ECN will take a fee and kick you back a rebate. Hence you'll earn a rebate trading profit.

Get out when you can post even a tiny one- or two-cent profit. Waiting for larger profits usually results in a net loss, since the stocks traded on ECNs are so very liquid. If you see a price start to rise and you want to wait for a profit, rest assured that other rebate traders are watching the same price and may cut out before you do. The key is to take a low rebate and get out ASAP.

Know that it's not whether the stock gains or loses in a day, it's how many transactions you facilitate that allows you to take advantage of the rebates offered by ECNs. Use your access to ECNs in every time zone to maximize your day trading profit.

Trade in as much volume as possible, since rebates can be a fraction of a cent per share. Volatile, frequently traded stocks are usually chosen by rebate traders, since small numbers of trades will rarely yield a worthwhile profit, even if they are very large trades. This methodology relies on frequency rather than size.

Tips & Warnings

  • When you use rebate trading as your day trading strategy, you have to be very time- and software-savvy. Use the ECN you are most comfortable with and know that this is a "get in and get out" game, with no leeway for laggardly responses.
  • Perhaps the only reason the SEC continues to allow market traders to engage in rebate trading is because it keeps the market liquid and shares and money flowing.

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